ROBIN HARGREAVES ON HIS OWN BEHALF ON BEHALF OF THOSE LLOYDS' SYNDICATES LISTED ON THE SCHEDULE TO THE WRIT OF SUMMONS v. TAIAN INSURANCE CO. LTD

HCCL 27/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 27 OF 2005

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J U D G M E N T

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The application

1. This is an Order 12, rule 8 application, by summons dated 8 December 2005, whereby the defendant herein, Taian Insurance Co. Ltd (‘Taian'), seeks to set aside an ex parte Order of this court, dated 30 July 2005, granting leave to the plaintiff, a representative of certain Lloyd's insurance syndicates, to issue a concurrent writ against the defendant and to serve a sealed copy thereof on the defendant in Taiwan.

The background

2. The plaintiff, Mr Hargreaves, represents a number of Lloyd's syndicates which had delegated authority to enter into reinsurance contracts to an Hong Kong agency called International Reinsurance Services Ltd (‘IRS').

3. IRS derived its authority to enter into such contracts of reinsurance through a document known as a ‘Binding Authority', numbered TR041943 dated 17 November 2004. 

4. This Binding Authority contained an express restriction on the authority of IRS to enter, on behalf its principals, any retrocession business, which it is accepted by both sides in this case connotes reinsurance of reinsurance (re-re-insurance).

5. What happened was this.

6. In May 2004, IRS on behalf of the syndicates entered into a contract (‘the Contract') of reinsurance with the defendant, a Taiwanese insurance company, under which Taian sought to re-insure with the plaintiff 0.5% of a risk pertaining to property belonging to a group of Taiwanese companies known as ‘ASE', (or Advanced Semiconductor Engineering Inc.), which entity makes, inter alia, computer chips.

7. As luck would have it, a fire broke out at the premises of ASE on 1 May 2005, notification of which was given by the defendant to IRS by email on 3 May 2005; the loss in question provisionally was quantified at NT$7,650 million.

8. The plaintiff has taken the view that it is not liable to meet any claim arising out of this loss, and in this jurisdiction has issued what is essentially a pre-emptive strike seeking negative declaratory relief. 

9. By its writ dated 28 July 2005 the plaintiff sought a declaration that the Lloyd's syndicates were not liable to the defendant upon the Contract of re-insurance effected with the defendant through the medium of IRS, alternatively that the relevant Contract had been rescinded.

10. The plaintiff's fundamental argument is thus : it is said that the Binding Authority contained a restriction upon the authority of IRS to enter into ‘retrocession business', in other words that IRS had authority to reinsure the risk of an insurer which directly underwrote the risk of an insured, but not to reinsure the risk of an insurer which itself was a re-insurer.

11. Thus, in the instant case it is alleged by the plaintiff that the defendant, Taian Insurance Co. Ltd, was not such a direct insurer, but in fact was a re-insurer of another Taiwanese company, one Chung Kuo Insurance Co. (‘Chung Kuo').

12. It follows, therefore, that on the plaintiff's case the Contract effected with Taian via the agency of IRS was not a contract of reinsurance (which would be binding as being consistent with the vires within the Binding Authority), but instead was a contract of re-re-insurance, or retrocession, falling outside the scope of IRS' authority.

13. It is alleged further that at the time of the entry into the Contract that the defendant was aware of such restriction upon the authority of IRS by reason of the fact that the defendant had been sent, on an annual basis, a copy of the relevant Binding Authority; alternatively it is further asserted that even if IRS had been authorized to enter into the Contract, the defendant has been guilty of misrepresentation in that it did not reveal to IRS the true nature of its dealing with Chung Kuo, in consequence whereof the syndicates are entitled to avoid the Contract.

14. The defendant's position, however, is that the contractual classification adopted by the plaintiff is in error, and that this Contract was not a contract of re-re-insurance at all. 

15. To the contrary, the Contract effected with the plaintiff via IRS is said by the defendant to be a true contract of reinsurance, and not one of retrocession, the defendant maintaining that it was a direct insurer of part of the ASE risk pursuant to that which is referred to in Taiwan as an ‘internal co-insurance arrangement'.

16. On the face of the evidence that which appears to have happened, as a matter of fact, is that at the outset the defendant, Taian, had wished to obtain a slice of the direct insurance pie in terms of being the immediate insurer of the ASE risk, which it then had wished to lay-off with the plaintiff syndicates (via IRS) by way of reinsurance.

17. However, this initial aim did not transpire, the ASE risk being lead underwritten by a policy issued by another insurer, one Zurich Insurance (Taiwan) Ltd (‘Zurich').

18. In the event Chung Kuo took 5% of the ASE risk lead underwritten by Zurich, and Chung Kuo, in turn, shared 2.5% of this risk with Taian upon that which is described as an ‘internal co-insurance' basis.

19. The evidence filed by the defendant upon this application reveals that under Taiwan insurance law and practice, there exists a doctrine of ‘co-insurance', whichdiffers from re-insurance, under which a number of different insurers are able to ‘share' the risks undertaken by one of them.  The specific concept of ‘internal co-insurance' refers to a situation wherein an insurer (or insurers) named in the relevant policy shares the risk with a number of other local Taiwanese insurers whose names are not stated on the policy (in contradistinction to the obverse ‘external co-insurance', wherein the names of the co-insurers appear); it is said that this is a unique feature of the Taiwanese insurance market attributable to the sharing of risks among all 14 Taiwanese insurance companies, which it is said regard themselves as one ‘family'.

20. Accordingly, the position of Taian is that it is an ‘internal co-insurer', together with Chung Kuo, and thus by the Contract effected with the plaintiff through the medium of IRS, Taian actually was reinsuring its part of this risk, and not retroceding, or re-re-insuring.

21. Hence, the argument runs, on this basis the Contract effected with the plaintiff was within the authority of IRS to make, and thus that the plaintiff, contrary to its contentions, remains liable for that part of the risk that it has underwritten.

22. However – and this is the nub of the present application – on behalf of Taian it is said that in light of this factual matrix that this is a case which should not be fought here in Hong Kong for the reason that the established Order 11 benchmarks have not been met.

23. Accordingly, I turn to consider each of the arguments thus raised in support of the defendant's position in this application.

The defendant's contentions

24. The general principles applicable to this type of debate are common ground between the parties: in summary, the plaintiff, which in an Order 11 application bears the burden of proof, must show (i) that there is a good arguable case that the facts fall within one of the relevant heads of Order 11, rule 1(1); (ii) that in terms of the dispute itself there is a serious issue to be tried; and (iii) that the case is one which falls within the rubric of Order 11, rule 4(2), namely that “No such leave shall be granted unless it shall be made sufficiently to appear to the Court that the case is a proper one for service out of the jurisdiction under this Order”.

25. For his part, Mr Shieh SC, on behalf of the defendant applicant, maintains that the plaintiff falls down under the first and third of these primary elements.

(i)  Order 11, rule 1(1): the relevant heads: good arguable case?

26. The Order of the court granting leave to serve out rehearses that leave was granted pursuant to Order 11, rule 1(1)(d)(i), (ii) and (iii).  I pause to comment that for my part I am unsure if indeed this was the case, but in any event that is what the Order recites on its face, and given that there has been no application to vary its terms, I proceed to determine this application on this basis.

27. Mr Shieh launches his attack against the applicability of all three elements of rule 1(1)(d).  Let me take them in order.

Sub-rule 1(1)(d)(i) : …a contract which was made within the jurisdiction

28. Mr Shieh asserts that, on the evidence before the court, this head must fall, given that upon his reading of the email exchanges between the IRS in Hong Kong and Taian in Taiwan, the Contract was made in Taiwan.

29. I disagree.  In my view there is a good arguable case that the fax accepting the IRS offer to take “special 0.5% share of TSI” (total sum insured) was received in Hong Kong on the same day pursuant to a Taian Insurance Co. Ltd chop countersigned by one Jason Tsai, and I disagree with the contention that the Contract did not come into existence until the sending by return by IRS of a confirmatory fax relating to “0.5% line of TSI”.

30. Thus in my judgment the defendant's objection relating to the applicability of sub-rule (d)(i) fails.

31. It follows that in my view the plaintiff is successful in terms of bringing himself/themselves within one of the primary jurisdictional heads of Order 11.

32. Given this conclusion, there is no necessity to consider in any detail Mr Shieh's alternative submissions relating to the relevance of sub-rules (d)(ii) and (iii).  However, should this matter go further, I should briefly advert to these aspects also.

Sub-rule 1(1)(d)(ii) : …a contract which was made by or through an agent trading or residing within the jurisdiction on behalf of a principal trading or residing out of the jurisdiction

33. Notwithstanding the express terms of the Order, this subhead was not relied upon by the plaintiff in its response to the application to set aside leave to serve out of the jurisdiction.  Be that as it may.  In the circumstances the Court has asked to be addressed upon its applicability.

34. Mr Shieh submitted that in this context the decision of Mr Justice Phillips (as he then was) in QBD Union International Insurance Co. v. Jubilee Insurance Co. [1991] 1 WLR 415 should be followed, wherein the learned judge held that to give a sensible construction to this sub-rule words were to be implied so that the sub-rule referred to defendant and not to a plaintiff, and that, therefore, the term ‘principal' in sub-rule (d)(ii) was to be construed as a foreign defendant who had entered into a contract through an agent acting on his behalf within the jurisdiction.

35. Mr Shieh argued that the policy of Order 11 was to identify certain situations wherein there was a sufficient degree of connection between the claim made against the foreign defendant and Hong Kong; to the contrary, Mr Manzoni pressed on the court the fact that sub-rule (1)(d) was concerned only with ‘the contract' and not ‘the person', and thus that the construction adopted by Phillips J should not be followed.

36. I have been reminded that this court previously has considered the ambit of this sub-rule, albeit obiter, in Transamerica Occidental Life Insurance Co. (Hong Kong Branch) v. King Sound Industry and Anr [2005] 1 HKLRD 125, and that in that case had favoured the approach adopted by Phillips J.  

37. It strikes me that this issue could usefully admit of appellate consideration, not least because once again the view of this court on this matter is not necessary to determine this particular case in light of my earlier conclusion as to the applicability of sub-rule (d)(i).

38. However, having reconsidered the issue, I have once more reached the view that the construction adopted by Phillips J in QBD Union, op cit, is to be preferred, and, if this be correct, as I consider that it is, it follows that in the circumstances Mr Shieh is correct that sub-rule (d)(ii) is inapplicable, and that Mr Manzoni was right specifically to eschew reliance upon sub-rule (d)(ii) in his initial skeleton argument.

39. Accordingly, if such conclusion be necessary, I find that the plaintiff's purported reliance upon sub-rule (d)(ii) cannot be sustained.

Sub-rule (d)(iii ): …a contract which is by its terms, or by implication, governed by Hong Kong law

40. I defer consideration of this head until later in this judgment for the reason that this is the issue which is central to the forum conveniens element of this case, the resolution of which has formed the primary basis of the present application to set aside the Order granting leave to the plaintiff to serve out of the jurisdiction upon the defendant in Taiwan.

(ii)     Order 11 : serious issue to be tried?

41. There is no necessity to dwell upon this element.  The parties are in agreement that there is no question but that in this case there is a serious issue to be tried, and save to indicate such agreement, I have not been addressed upon this aspect.

(iii)    Order 11, rule 4(2): the issue of ‘forum conveniens'

42. It is clear that, in contradistinction to the position in an fnc stay application, wherein jurisdiction, established as of right, is sought to be disturbed by the defendant, in the Order 11 context it is the plaintiff applicant who bears the burden of establishing that, in the words of Order 11, rule 4(2), “the case is a proper one for service out of the jurisdiction under this Order.”

43. What does this mean in practical terms?

44. It is at this juncture that the parties have a fundamental difference of view.

45. Mr Shieh says that in the context of this debate the plaintiff must demonstrate that Hong Kong is clearly and distinctly the natural forum: see, for example, The Spiliada [1987] AC 460 and Rambas Marketing Co. v. Chow [2001] 3 HKC 250.

46. Mr Manzoni, for the plaintiff, however, does not accept that his burden is to show that Hong Kong is ‘clearly' the more appropriate forum but that, when properly understood, the correct test is that set out by Lord Goff in Spiliada, op cit, at 480G, wherein he refers to the identification of the forum “in which the case can be suitably tried for the interests of all of the parties and for the ends of justice.”  Thus, says Mr Manzoni, the Hong Kong jurisdiction obviously meets this benchmark.

47. I grasp the forensic reason underpinning this argument; however, I am unable to agree.

48. In Spiliada, op cit, at 481D-E, Lord Goff says, in terms, within the context of that which Lord Diplock had referred to (in Amin Rasheed [1984] AC 50, at 65), as an “exorbitant jurisdiction”, that the effect of this is “not merely that the burden of proof rests on the plaintiff to persuade the court that England is the appropriate forum for the trial of the action, but that he has to show that this is clearly so.  In other words, the burden is, quite simply, the obverse of that applicable where a stay is sought of proceedings started in this country as of right.”

49. It seems to me, with due respect to Mr Manzoni's enthusiasm for the point, that in this regard the law is well settled, and has been for a number of years. See also in this context the commentary in Hong Kong Civil Procedure 2006, at M/N 11/1/10 (at page 105).

50. Accordingly I am unpersuaded by the new insight proffered, and I adopt the formulation adumbrated by Mr Shieh, namely that in order to get home the plaintiff must show not only that there is a good arguable case that the facts fall within one of the jurisdictional subheads of Order 11, rule 1(1), that the dispute involves a serious question to be tried, and also that the requirement within Order 11, rule 4(2) involves demonstrating that Hong Kong “clearly” is appropriate for the trial of this action; the question is not whether the Hong Kong courts can deal with the issues, but whether Hong Kong is “clearly and distinctly” the appropriate forum.

51. This approach thus brings into play the analysis to the litany of ‘connecting factors' frequently rehearsed in cases of this ilk.  The evaluation is perhaps not as facile as whomever is able to compile the longer list, but nevertheless the court is charged in this context with reviewing the issues arising in the particular case before it, and thereafter in forming a judgment as to whether such factors clearly point to Hong Kong as the appropriate forum for the determination of these issues.

52. Both parties have filed extensive evidence, but in terms of the usual ‘connecting factors' such as existence/locus of English documentation and the presence of witnesses of fact there is no decisive pointer.

53. It seems to me, however, that a potentially decisive element arises in terms of the necessity for expert evidence as to Taiwanese insurance practice – I have in mind here the unusual concept of ‘internal co-insurance', which is prayed in aid by Taian – and also, and this has turned out to be the crux of the present debate, the issue of whether the putative proper law of the Contract entered into between the plaintiff and Taian via the agency of IRS is Taiwanese law or English/Hong Kong law.

54. This issue of the putative proper law has occupied a significant part of the argument in this court upon this application, and it is for this reason that I have chosen to deal with this element under this head rather than to consider it within the specific context of rule 1(1)(d)(iii).

55. For the defendant Mr Shieh says that the proper law of the Contract indisputably is Taiwanese law, and that the contention that Hong Kong law is the proper law is “unarguable” – thus, if the matter were to be tried in Hong Kong, expert evidence of Taiwanese law and of Taiwan insurance practice undoubtedly would be required.

56. He says that this is the case for, as I understand it, two main reasons :

First, that the Taian Offer Slip (which was signed back by IRS confirming the percentage of 0.5% of TSI) stated, at Clause 3 thereof, that “Other terms and condition follow the original policy”, that in the circumstances the ‘original policy' there referred to must be the Zurich policy directly insuring the ASE risk, and that Clause 39 of that Zurich policy specifically chose Taiwan law as the proper law; alternatively, if the Zurich policy is not the ‘original policy' within the meaning of that term, the only other candidate would be the document evidencing the arrangement between Chung Kuo and Taian (which the defendant says is evidence of ‘co-insurance' and not re-insurance), the proper law of which must also be Taiwanese law, as it evidences the sharing of risk between two Taiwanese insurance companies in relation to a Taiwanese risk denominated in Taiwanese currency; and

Second, that even if one were to disregard both the Zurich policy and the document evidencing the relationship between Taian and Chung Kuo, the objective proper law of the Contract existing between the plaintiff and the defendant can be divined through an examination of the relevant connecting factors, and that in the circumstances the conclusion again must be that this is Taiwanese law: the insured amount is denominated in Taiwanese currency, and the place of performance, wherein payment of the insurance proceeds would be made, is Taiwan.

57. For the plaintiff Mr Manzoni laid stress on the fact that the Contract, on his case, was made in Hong Kong and was to be performed in Hong Kong, that the documentation was in English, and further – and of particular importance within this debate – that the Binding Authority, regulating the relationship between IRS and its plaintiff principals, and reflective of the actual authority of IRS, was a document clearly governed by English/Hong Kong law. 

58. In this connection he referred the court to Dicey & Morris, 13^th Ed., Rule 198, which states that “The rights and liabilities of the principal as regards third parties are, in general, governed by the law applicable to the contract concluded between the agent and the third party”, but nevertheless pointed out that thereafter, in the commentary to this rule, at paras. 33-42, the learned editors of this latest edition of Dicey, op cit, commented that :

“Although it is consistent both with principle and authority to determine questions which relate to the ostensible authority of A by reference to the law applicable to the contract between A and T, the position with regard to the actual authority of an agent is less clear and there is no decision which gives explicit consideration to the question.  Since actual authority (express or implied) involves determining what the particular agent is actually authorized to do, there is something to be said for determining the existence and scope of such authority by reference to the law governing the relationship between P and A, ie. Rule 197, rather than by reference to Rule 198…”  (emphasis added)

59. Mr Manzoni urged the court to follow this approach in the present case, so that the term “Retrocession Business” within the Binding Authority exclusion would be construed according to English/Hong Kong law, with the consequence that, on the facts of the present case, there could be no doubt but that Taian had been re-insuring its portion of the ASE risk, and thus that the risk purportedly covered by the plaintiff, via the agency of IRS, was truly retrocession (which was excluded) and not reinsurance (which was not). 

60. If this approach be right, submitted Mr Manzoni, Hong Kong clearly was the more suitable venue for the determination of the issue of whether the subject-matter of the Contract fell within the exclusion in the Binding Authority, and when viewed from this perspective the proper law of the Contract between Taian and the plaintiff essentially was “irrelevant” to this question.

61. Further and in any event, he argued, there was, on the facts, also a good arguable case that Hong Kong law was the putative proper law of the Contract.  In this regard, he said, reinsurance has no particular need to follow the choice of law of the underlying insurance, and the words “Other terms and conditions follow the original policy” do no more than confirm back to back coverage, and do not necessarily incorporate the choice of law clause : see, for example, Gan v. Tai Ping Insurance [1999] Lloyd's Insurance Reports 472.  The system of law with which the substance of this reinsurance contract had the closest and most real connection was either English law or Hong Kong law, he said, and when the agent through which the contract was made is in Hong Kong, and the contract was made in Hong Kong, there was a good arguable case that Hong Kong law was the proper law of the contract so made.

62. Lastly, Mr Manzoni submitted that even if the proper law of the Contract was not to be Hong Kong law, in itself this was no reason not to hold that Hong Kong was not the forum conveniens ­– Hong Kong courts are perfectly able to apply foreign law, and to evaluate the evidence of foreign experts as to Taiwanese law and insurance market practice.

63. I have endeavoured to outline the broad parameters of the argument, during which I also was referred to a number of insurance/reinsurance cases dealing with the actual/ostensible authority of Hong Kong agent, IRS.

64. I did not, however, find these cases of great use, nor, I confess, did I grasp the relevance of the emphasis placed upon the actual/ostensible authority debate in the present circumstances.  It seems to me that analysis founded upon the actual/ostensible authority distinction, and identification of the system of law determining the ambit of such authority, is something of a red herring in the context of the present application.

65. The fact is that, as Mr Manzoni made clear in argument, that there is no dispute between the parties as to the meaning of ‘Retrocession Business' within the Exclusion Clause in the IRS Binding Authority.  To the contrary, the only ‘live' dispute is whether that which Taian in fact was doing, in terms of the practice of that which is described as ‘internal co-insurance', properly may be classified as ‘retrocession business' properly so-called and as generally understood within the industry? 

66. From this perspective, therefore, no issue arises between the parties in terms of what IRS actually was authorized to do, and for the purposes of argument I would even be prepared to assume that there was no issue but that Taian did know that retrocession, as that term is understood by both parties, was outwith IRS' authority, thereby obviating the need separately to consider the issue of ostensible authority, which I accept in itself would attract application of Taiwanese law.

67. Looking at the matter in the round, I decline to accept Mr Manzoni's implicit invitation to categorise the putative proper law of the Contract as essentially incidental and “irrelevant” within the terms of the present debate, and it seems to me to be very strongly arguable, and for present purposes I so find, that the putative proper law of the Contract between the plaintiff and Taian is Taiwanese law.

68. In this connection, it does not matter greatly if this pre-trial conclusion is based upon application of Dicey's Rule 198, and/or upon the fact that on the facts there is (a) an express choice of law in terms of Clause 3 of the Offer Slip, (which would be logical if the terms in the Zurich policy and in the Contract, which are essentially ‘back to back', are to be interpreted uniformly) and/or (b) the law with which this Contract, when regarded objectively, has its ‘closest and most real connection'; suffice to say that for present purposes I am content to rely upon all these reasons to underpin such finding.

69. Despite the ability with which Mr Manzoni invested his contrary argument, I further decline to accept his contention that there is a good arguable case that it should be the English/Hong Kong law governing the Binding Authority which should constitute the putative proper law of the Contract.

70. For my part I can see no reason in principle why if a third party concludes a contract with an agent otherwise governed by the law of country X that he then should have to be concerned with the law governing the relationship between the agent and his principal, to which that third party is not privy and over which he can have no influence – a position which must be a fortiori in this case where there is no dispute between the parties about the actual meaning to be accorded to the term ‘retrocession business' within the Binding Authority.

71. Nor do I consider that the fact that I have preliminarily concluded, for the purpose of rule 1(1)(d)(i), that there is a good arguable case that Hong Kong was the place of formation of the Contract, through the medium of IRS, is something which is other than an essentially fortuitous circumstance, which on the particular facts has little relevance to the appropriate place for trial of this action nor, for that matter, upon the issue of the putative proper law of the Contract.

72. And whilst of course I can accept the proposition that the Hong Kong court is more than competent to consider foreign law and to evaluate the evidence of foreign experts, in my view there is nothing to the immediate point, which is whether against this backdrop the plaintiff has demonstrated that Hong Kong “clearly” is the forum conveniens?  The answer to this, it seems to me, must be No.

73. In light of these conclusions, therefore, I have come to the view, albeit after some reflection, that the plaintiff in this case has fallen at the Order 11, rule 4(2) hurdle, and that it has not established that Hong Kong clearly is the appropriate forum for the trial of this action. 

74. To the contrary, it strikes me that Taiwan equally clearly is, given the relative neutrality of the other factors (that is, locus of witnesses/documents), when taken together with the importance to be attached in this case to Taiwanese law and insurance practice – although in fact, as Mr Shieh was at pains to point out, in the context of an Order 11 application he was not in the position of having formally to identify (as would have been the position in a stay application) a more appropriate alternative forum.

Postscript

75. During argument Mr Manzoni was minded to observe that this case was regarded as having important insurance industry implications.

76. Putting to one side the fact that special pleading of this nature is of no moment in terms of the application of established principle, the fact remains that it is entirely open to the insurers and their agents to underwrite cover on the express basis of a Hong Kong jurisdiction/choice of law clause, and thus effectively to obviate the type of argument/jurisdictional dispute that has arisen in this case.

Order

77. It follows from the foregoing that in the exercise of my discretion I hold that the ex parte Order of this court dated 30 July 2005 is to be set aside, and that the defendant is to have an order in terms of paragraphs 1-4 of its summons dated 8 December 2005.  I so order.

78. I decline to grant the declaratory relief sought at paragraph 5 of that summons.

79. As to costs, I make an order nisi that the defendant is to have the costs of this application, and of this action, such costs to be taxed if not agreed.